S&P500 Stalls…and Retreats

After advancing earlier in the week, the S&P500 had a very bad day on Friday (on which it lost 2%) to close the week down almost 0.8%. Volume was light, and volatility spiked into the mid-teens. That said, a mid-teen reading on the VIX is still not a level associated with panics.

Interestingly there was no big piece of news that drove the late week sell-off. In fact, several economic reports surprised to the upside—factory orders, initial jobless claims, the Philly Fed survey, leading indicators and existing home sales all beat their respective estimates. Only the housing market index, and PMI composite flash disappointed. So in many ways, the US economic picture brightened a bit last week.

On the technical front, the S&P500 has still not returned to old highs set in early October 2018. And last week’s decline….somewhat close to the prior level of resistance at 2,800….suggests that this technical resistance has yet to be broken. The 200 day moving average is now essentially flat, and prices are only slightly above this critical marker. So it’s far from clear, technically, where this market is headed next….especially over the next several days and weeks.

One of the major drivers of last week’s sell off was, ironically, the recent dovish u-turn made by the Federal Reserve. After a couple of years of tightening, the recent decisions to scrap further increases in the Fed Funds rate and to stop the balance sheet wind down later this year both suggest that the Fed is now worried that it may have over-tightened and that a recession is more likely to arrive in the near future.

The US stock markets, picking up on this interpretation, may be starting to sell off in anticipation of this recession and the consequent reduction in corporate earnings.

Sure there are other plausible explanations, but this one was getting a lot of press after Friday’s big sell-off. Let’s see what the next week or two brings to the S&P500.

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